Basic Terms of Bonds

Maturity

One key investment feature of any bond is its maturity. A bond’s maturity tells you when you should expect to get your principal back, and how long you can expect to receive interest payments. (However, some corporates have “call,” or redemption, features that can affect the date when your principal is returned. SeeUnderstanding "Call" and Refunding Risk.)

Corporate bonds, in general, are divided into three groups:

Short-term notes:

Maturities of up to 5 years

Medium-term notes/bonds:

Maturities of 5-12 years

Long-term bonds:

Maturities greater than 12 years

Structure

Another important fact to know about a bond before you buy it is its structure. With traditional debt securities, the investor lends the issuer a specified amount of money for a specified time. In exchange, the investor receives fixed payments ofinterest on a regular schedule for the life of the bond, with the full principal returned at maturity. In recent years, however, the standard, fixed interest rate has been joined by other varieties. The three types of rates you are most likely to be offered are these:

Fixed-rate. Most bonds are still the traditional fixed-rate securities described above.

Floating-rate. These are bonds that have variable interest rates that are adjusted periodically according to an index tied to short-term Treasury bills or money markets. While such bonds offer protection against increases in interest rates, their yields are typically lower than those of fixed-rate securities with the same maturity. (SeeUnderstanding Interest-Rate Risk.)

Zero-coupon. These are bonds that have no periodic interest payments. Instead, they are sold at a deep discount to face value, and redeemed for the full face value at maturity. (One point to keep in mind: Even though you do not receive any cash interest payments, you must pay income tax on the interest accrued each year on most zero-coupon bonds. For this reason, zeros may be most suitable for IRAs and other tax-sheltered retirement accounts. Other tax aspects of zeros are discussed under How Corporate Bonds Are Taxed—Original-Issue Discount.)

All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.